I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Wednesday, September 30, 2009

Your Deficit Feathers At Work

Government finances are in a parlous state. The 12-month running budget deficit has grown to an astonishing 1.5 trillion dollars, a number so large in the normal context of "money" that it makes dollar signs entirely meaningless. We might as well call them chicken feathers dropping from madly twirling helicopters.

This monstrous deficit has not come about so much because of a shortfall in receipts; rather, it is outlays that are ramping up - vertically. Since September 2007 annual receipts are down 15.5%, but outlays are up by 34.6%. The result is a chart that looks like a snake with its jaws spread wide open to accommodate its oversized lunch (that's us).

The Deficit Snake

Deficit as a percentage of revenue is now at a record 70%, double the previous high reached in 1983.

Where is the extra spending going? In just the 11 months of the current 2009 fiscal year (it ends in September) outlays have increased by 512 billion versus the same period last year. The major spending increases from 2008 are shown in the chart below:

Where The Extra "Feathers" Went

The Treasury's Troubled Assets Relief Program (TARP i.e. direct bailouts for the financial sector) is by far the largest user of extra feathers at a massive 175 billion and accounts for a full 1/3 of the additional spending. By comparison, spending on all other economic recovery programs increased by less than half that. Interestingly, spending on education dropped by 10 billion.

I truly do not see how we will ever climb out of this deficit hole, without seriously reforming fiscal policy. Where are the massive initiatives to transform the U.S. into a localized green economy? Where are the incentives to use less imported oil and to rely on wind, solar, geothermal instead? Where are the subsidies to overhaul the antiquated electricity grid?

Why are we spending tax money to promote buying new cars without requiring them to be low or zero emissions? Why are we providing 8,000 feathers at a pop for houses, but don't insist they are highly energy efficient and have solar roofs installed?

Why is Mr. Obama's government so stubbornly insistent on following the old Bush/Bernake/Paulson agenda? Where's the outside-the-box thinking? The president is perilously close to wasting his entire political goodwill on a mild reform of the health system, while at the same time feathering the nest of a corrupt financial sector.

Taxpayers are in danger of becoming plucked chickens with nothing to show for it..

______________________________________________________P.S. A reader mentioned containerships yesterday and I realized I forgot to include data for them in the previous post about sea cargo. Such ships carry mostly finished goods and their charter rates are, thus, a gauge of consumer demand for imported goods. Here is a relevant chart:

For vessels capable of carrying 2,000 - 2,300 TEU (a typical modern containership), daily charter rates have plunged from $12.5/day/TEU in the middle of 2007 to $2.50/day/TEU right now. For a 2,000 TEU vessel, this translates to its charter rates going from $25,000/day to $5,000/day. Importantly, the length of the average charter has gone down to a mere six months versus 3+ years. Both measures are the worst in at least 10 years.

I saw Fight Club again the other night and I realized that it was perhaps ten years too early. Now I will watch Clive Barkers "The Midnight Meat Train", a story about ancient monsters deep under New York called "the founding fathers" that must be fed with human flesh to preserve the nation ;-)

The deficit profile is consistent with the ramp up in spending for the First and Second World Wars--however, we are not fighting a war (not to make light of the sacrifices of the service men and women in Afghanistan and Iraq--what I mean is that the country and economy haven't become focused on the wars.)

What is curious are the large and sudden cutbacks of federal spending which are projected for the next three years--I'm looking at OMB projections which show outlays dropping from $4 billion this year to $3.6 billion for the next three years (I'm not sure if the $4 billion is right--it looks more like $3.8 billion to me from the Treasury receipts report). In any case, it would not be keeping with historical pattern of continuing to run large (20%) budget deficits over many years in order to inflate our way out of recession (as in the 80's). I do not think we will see even a recovery in nominal terms if federal spending falls or stagnates (I'm not saying they should spend more, don't get me wrong.)

To me, the federal government can't ramp up spending fast enough without the pressure of a major war to really ignite the economy (in nominal terms). That is why their final inflation solution will be to simply distribute large numbers of dollars to the populace--it might take them a few years to figure it out--say, 2012, right before the next presidential election. . .

"We'd be using our energies more efficiently in passing the public option for campaign finance reform. This will not end until we take the bribes out of the system."

Amen! There is a decent chance that were our elected officials elected in a very different manner, that, for starters, the "No Banker Left Behind" bailout would never have passed Congress.

In the meantime, I'd like to address one key sentence in Hell's post:

"I truly do not see how we will ever climb out of this deficit hole, without seriously reforming fiscal policy."

Indeed, we will not climb out of the ever deepening fiscal hole, without serious reforms. Going forward one of two things will occur:

We will either get our fiscal house in order by massively cutting "government" programs, or by hook and by crook our currency will lose more purchasing power-perhaps to the point of hyper-inflation- as government cease to fund our day to day borrowing needs.

Recently, on CNBC, (sorry the link is dead) a pundit offered that the latter course is in the works for the U.S. but that the loss in purchasing power would be gradual. I, for one, have serious doubts regarding the ability of the PTB to pull that off.

Hey, BWDIY, I'm not a snob, and I LOVE company.And thanks yet again, Hell.I'll know I've REALLy arrived when I get you quoting from the Merchant of Venice, right ? ;-)But Alexander Pope is GREAT. Ten million shots better than Hobbes...

Hell, do you know what % of that TARP money actually went to the personal pockets of decision makers in the financial sector and % went to the rest of us to prop up personal checking/savings accounts and company payrolls, etc...?

I remember you suggested we might have avoided much of a crisis might by guaranteeing personal accounts to the tune of 0.5 million, but I have always been confused on this issue as I am quite certain my hospital payroll (for many thousands of people) is on the order of many tens of millions a month. Further I know some hospitals (and many law firms, etc...) maintain their payroll accounts at Citibank/Wachovia/B of A, etc...

Surely a good chunk of this went to uses like this, no?

Most hospitals I know operate on less that 5% profit margin, so it would take a very long time to save enough cash to make up the loss of even one month's payroll.

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. [info][add][mail] Thomas Jefferson

Anyone want to take a quess as to how big a percentage of the mortgage loans outstanding are owned by the Federal Reserve?

I'm against all giveaways, whether TARP, AIG, cash-for-clunkers or the $8,000 bribe for homebuyers to "catch a falling knife", er, I mean buy a house. But requiring solar panels in order to qualify for your $8,000 bribe would be doubling down on idiocy. They may be great in San Diego (in which case people shouldn't have to be arm-twisted into getting them), but in most of the country (yes, MOST), they are of minimal effectiveness. If you want to incent people to save energy (I'd be OK with that), raise the price of energy (with increased taxes - especially on gasoline) and the market will bring about the best technological ways to conserve energy.

Sooner or later the dollar along with many other currencies (Yen, Euro) will essentially become worthless or worth less. That however won't necessarily mean that you will have more dollars/Yen/Euro at your disposal. Our standard of living has nowhere to go but the way of our currency and that is down.Government can't really go broke, they own the printing press. The people that'll go broke are the holders of currency and treasury bills and by extension our economy and all that depend on our economy.

Please help me out here. If I am reading Krugman correctly, he is suggesting that his models say we would need $10 Trillion in QE (instead of the $1.26 Trillion we have had as per Hell) in order to destroy the dollar. And even Krugman does not think the Fed will do this.

I vote with Yoski on this one.Indeed, if Mr Krugman had to GO OUT INTO THE REAL economy and exchange his filthy lucre for real TANGIBLE and non abstract commodities (but even intangibles are involved, I'm not THAT naïve..), he and others who are gravitating in his high mathematical spheres would realize that :their filthy lucre is buying less and less all the time.Um... that's called INFLATION, isn't it ?Whatever the models say ?Once again, the underlying issues are fascinating : they involve the SCIENTIFIC status of economics...And we SHOULD know that the so called SOCIAL sciences are STILL caught up in the epistemological trap that the "hard" sciences have ALREADY broken out of. That means "objectivity", "mathematics" as truth, etc.

Running one $1.5 trillion dollar deficit will not destroy the dollar. Running trillion $$ deficits year after year certainly will. To pay the interest on $1.5 trillion at 4% will cost $60 billion a year. That's $60 billion not available for more worthwhile endavours. Of course we will just be borrowing more to bailout everything under the sun. How far can it go? Probably further than most imagine. Our federal debt is currently at 83% of GDP. Japan's is at around 200% of GDP, which is world record. Since we're currently adding around 10% debt to this ratio it'll take us about 12 years to get where Japan is now. But make no mistake, this game can and will not go on indefinitely. Exponential growth is a terrible opponent if it works against you. Sooner or later the debt train will reach the end of the line.If the money had been invested wisely, in energy, infrastructure, education we might prosper, increase GDP and be able to service the debt. Instead the money was used to bailout the foolish, greedy and ineffective. You think GM and Chrysler will now be self sufficient? You think Wall Street has learned anything? Indeed they did learn something. Be too big to fail and make gambles big enough so that you get bailed out in case the deal fails.I my opinion we've already passed the point of no return. It's only a matter of when, not if.

I thought Hell already went over this with us. I am the first to admit I can misunderstand this/him and if so would you please help me with any misunderstanding I have?

A. We already did destroy the dollar these past years 14+ years by creating all the private debt we created and then spending it on fancy cars, homes, etc...

B. What has inflation been running these past 14 years?

C. What has gold done these past 9 years?

D. Now the dollar is skyrocketing in value in a hyper-deflation spiral as all this worthless private sector debt is collapsing.

E. We therefore slow the rise in our dollar by shifting some of this debt from private to public pockets and engaging in a little quantitative easing (e.g. we print a little money but nowhere near as large as the private debt collapse).

F. So deflation is assured for right now

And then there is predicting the politics of the future to see if inflation and dollar collapse will finally defeat it's deflationary nemesis.

Hmm, predicting cooperation... one of my favorite topics ;-)

SO going back to the Yogi Berra...

A. Remember what happened in California re: taxes/spending/borrowing?

B. Many in England also really really really want to borrow and print their way out of this mess. Yet this seems to be the latest twist in their saga of cooperation. I think I read a cut of 10% of government spending?

C. I am sure there are other examples...

So I find it a hard to agree with any strong convictions that we will continue down this path for a long time to come.

If the Keynesians were truly firmly politically aligned with the (shall we call them moneterists?), then why is no one making the argument in Congress that increasing health care spending is a wonderful Keynesian stimulus program we all need to get behind right now?

Instead they are fighting along that same old fault lines: "who is going to pay for all this?"

So maybe "yes", but maybe "no" and I don't see the reason for strong convictions at any rate.

Thai, I think that it is necessary to think about the psychological basis for what is going on, and our theories of 1) human nature and 2) money and its relationship to value, which it is supposed to.. MEASURE.Some things to think about : if you borrow money from your neighbor, then you have to talk to him, to FACE him in order to do so. And if he lends you money, he has several possible motivations : 1) he trusts you, and counts on the fact that you will repay him. 2) He really doesn't care whether you pay him back or not, he is lending money because it makes HIM feel good, and he wants YOU to feel good.When institutions and governments lend money.. there are no faces, no talk to go along with the fact of lending, and increasingly, the "money" is completely immaterial. So... WHY should anyone feel responsible about anything, and why should anybody feel as though the money HAS to be paid back ?WHY DOES THE MONEY HAVE TO BE PAID BACK ?And why does the money have to be paid back if it is borrowed against future generations ? How can we do this ? By borrowing against future generations we are destroying...temporality itself, indicating that we can have dealings with what is not YET present.To me, what is happening is the INEVITABLE consequence of the increasing ABSTRACTION of money. So... yes, we are dealing with a crisis that has been going on for a long time, but which is pushing us to the limit as we realize... that there are NO LIMITS to abstraction.The only viable limits are to be found in... the material world. Not in our thought, not in our accounting, etc.Detaching money from a physical support is a little bit like... taking the mind out of the body. Everything goes haywire, right ? And out of control ?

Deb, you know my opinions on the boundary conditions on thought (information structures) AND the physical world.

I will again appeal to authority:

“There is a fact, or if you wish, a law, governing natural phenomena that are known to date. There is no known exception to this law; it is exact, so far we know. The law is called conservation of energy; it states that there is a certain quantity, which we call energy, that does not change in manifold changes which nature undergoes. That is a most abstract idea, because it is a mathematical principle; it says that there is a numerical quantity, which does not change when something happens. It is not a description of a mechanism, or anything concrete; it is just a strange fact that we can calculate some number, and when we finish watching nature go through her tricks and calculate the number again, it is the same.”

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.